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Office of Regulation and Interpretations
June 22, 2011

Page 5

COMMENTARY: General commentary and data may be valuable to plan
sponsors in making their decisions. So long as the commentary or data is based on
generally accepted investment theories and prevailing investment industry
practices—as opposed to the individualized needs of the particular plan or its
participants—it should not be considered investment advice. For example,
recordkeepers might state that a particular investment has low volatility ratings,
which may be preferred by many participants. Alternatively, a recordkeeper may
note that an investment manager has overseen the particular mutual fund for a
long period of time. Also, the provider may note that, even though a fund had
poor performance in the recent past, the manager has a good long-term track
record.

This type of information should include a specific disclosure that, in making the
comments, the provider has not taken into account the particular needs of the plan
or other factors specific to the plan or its participants. The information should
clearly state that, instead, the commentary is based on generally accepted
investment theories and prevailing investment industry standards that would apply
to all plans and to long-term investing generally.

In some cases, a plan fiduciary may have decided to remove an investment option
and may ask a service provider for a replacement fund that is, based on objective
criteria, very similar to the fund being removed. Responding to this request with
objectively similar funds—or a single fund if only one is objectively similar—
should not give rise to fiduciary status.

COMMENTARY: The Department could easily take an approach similar to
Interpretive Bulletin 96-1 where it permits specific investments to be included in
an asset allocation model, so long as the plan sponsor is told that there are other
similar investments available to a plan and is told where information on those
other investments can be obtained. Also, the disclosure should specifically state
the criteria used by the provider in selecting the “objectively similar fund.” (Also,
providers should be able, without fiduciary status, to provide a calculator where
plan sponsors can generate that kind of information for themselves.)

Of course, there should also be a disclosure that, in performing the analysis, the
provider did not take into account the individualized needs of the particular plan
and its participants, but instead applied general objective criteria. Further, to the
extent that the provider, or any affiliate, receives any revenue sharing, internal
crediting, or other fees or revenues from the similar fund, it should provide a
statement that other choices may be available with lower expense ratios, different
revenue sharing arrangements that are non-proprietary, and so on. In other words,

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June 22, 2011
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The Department needs to provide additional guidance in this area to avoid
confusion and unexpected violations of the prohibited transaction rules. Given the
lack of definition in the proposed regulation of a “seller” and of an “agent,” it has
been particularly difficult for the private sector to understand the limitations, if
any, on this exception from the prohibited transaction rules. It is imperative for
the Department to provide additional guidance.

As an additional comment, the so-called platform exception is being
interpreted in a number of ways in the private sector. Perhaps the most obvious
application is the situation where a provider has a limited line-up of mutual funds and
other investments, for example, 200 investment alternatives. In that context, the
exception is easily understood. Some providers, though, interpret the exception to apply
to “open architecture” recordkeepers (i.¢., the recordkeeper is the “platform’”) where
thousands of investments are offered. It is important that the Department clarify its
intentions on this issue. Otherwise there is a risk of inadvertent fiduciary status and
resulting 406(b) prohibited transactions.

Finally, the proposal provides that the second prong of its definition is
satisfied if the “person” or an affiliate is a registered investment adviser or serves as a
fiduciary for the plan in any respect. Both of those provisions are unworkable. For
example, most bundled providers have affiliated registered investment advisers. They
may provide fiduciary investment advice to other plans (but not the subject plan), they
may manage affiliated mutual funds or collective trusts, or they may provide other
investment services not related to the subject plan. In fact—and as is often the case, the
plan sponsor and participants may not even know that the provider has are affiliated RIA.
Nonetheless, in those circumstances, virtually any list of investments could be viewed as
“recommendations,” even though the investments are not individualized to the plan or its
participants. The risk of litigation in that scenario is unreasonably high with no
corresponding benefit to the plan. Needless to say, it will have a chilling effect.

Similarly, a bundled provider may have an affiliated ERISA fiduciary who
has no impact on the selection of investments to be offered in a 401(k) plan. For example,
the investment manager of a stable value collective trust is an ERISA fiduciary for a
contract or product and must make that disclosure under the 408(b)(2) regulation. As with
registered investment advisers, the indirect fiduciary status would result in the possibility
of also being an investment adviser for selection of the plan’s investment alternatives
where a list of investments is provided to the plan sponsor even if it is clear that the list is
not individualized to the needs of the plan or its participants. It is not good policy to put
providers at risk with no corresponding benefit to plans or participants.

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Office of Regulation and Interpretations
June 22, 2011

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To avoid confusion, the alternative should be fully described (that is, it should be
clear who prepared the line-ups and for what purpose), the responsibility of the
plan sponsor to individualize the investment line-up should be clearly stated, the
conflicts (if any) of the provider should be disclosed, and the ability of the plan
sponsor to substitute, remove or add investments to the line-up should be
prominently stated in writing.

In the context of responding to an RFP, it is very common for service providers to
provide a non-individualized model plan menu of investment options. This is
necessary for pricing purposes and it is made very clear that the model menu is
not being recommended. This should not give rise to fiduciary status.

COMMENTARY: The purpose of the “non-individualized” investment menu is
usually to provide the plan sponsor and fiduciaries with an illustration of revenue
sharing and its impact on the cost of the recordkeeping services. To make the
illustration meaningful, the provider will often provide an investment menu that is
similar to the one that is currently in the plan (for example, funds in the same
investment categories and/or with similar levels of revenue sharing). Without this
information, it may be difficult for plan sponsors and fiduciaries to fully
understand the indirect revenues and the true costs. In fact, based on the
Department’s interim final 408(b)(2) regulation, recordkeepers must provide
similar information to responsible plan fiduciaries in order to engage in a
reasonable arrangement. However, from the plan  sponsor’s/fiduciary’s
perspective, it is important to have an illustration before selecting the investments
... in order to understand the impact of investment selection.

Again, even though the illustrations are intended to be general and not
individualized to the plan, there is a possibility that unsophisticated plan sponsors
could interpret the investment line-up as being a proposal of specific investments
for their plan. As a result, and in order to avoid that kind of confusion, it would be
reasonable to require that the provider specifically state that the investment line-
up is being presented for illustrative purposes only and is not a recommendation
of investments to be included in the particular plan. In addition, the provider
should state the rationale for the reference to the particular investments, for
example, whether they were popular investment selections in the same or similar
investment categories, whether they were selected to provide revenue sharing to
cover the cost of recordkeeping the plan, or both . . . and so on.

The service provider may provide objective reasons that a plan fiduciary might
choose one fund over another or might choose one model portfolio over another.

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of Regulation and Interpretations

June 22, 2011

Page 6

any conflicts of interest should be disclosed together with a specific description so
that the plan sponsor could properly evaluate the conflicts.

This issue is, in some ways, similar to the “reasonably similar” provision in
ERISA section 404(c)(4). That is, under 404(c)(4), plan sponsors must select
reasonably similar funds if they desire to maintain 404(c) protection on a
conversion or similar events. In that case, it would be helpful and appropriate for
non-fiduciary service providers to give plan sponsors information about
“reasonably similar” investments on their platform, so long as it is made clear that
(i) the recommendations are not individualized to the particular plan or its
participants and (ii) adequate disclosure is made about conflicts of interest, the
methodology of the analysis, and the availability of other reasonably similar
alternatives.

Also, under the Aetna Advisory Opinion (AO 97-16A), providers can both
remove and replace investment options on their platform if they follow the steps
outlined in the advisory opinion. Perhaps that methodology could be extended,
explained and amplified in the final regulation or in the preamble to the final
regulation.

In some cases, the service provider encourages a plan to have at least one
investment option in every specified asset class and to have a set of target date
Junds (or similar investments).

COMMENTARY: As mentioned earlier in this letter, many small plan sponsors
are unsophisticated and do not understand the concepts of modern portfolio
theory, such as, for example, the selection of asset classes or investment
categories that are not highly correlated to one another. As a result, it is helpful to
plan sponsors for providers to offer one or more sample line-ups of investment
categories. That might be in the form of a single suggested set of investment
categories or it may be several alternatives, for example, a conservative
arrangement for less sophisticated workforces, a moderate arrangement, and an
aggressive arrangement for more sophisticated workforces. However, it would be
up to the plan sponsor to determine the individualized needs of its plan and its
participants; that is, whether it is it appropriate for the workforce to have a
conservative, moderate or aggressive line-up.

While these services are helpful to small and or unsophisticated plan sponsors,
they are not individualized. To ensure that they are not misunderstood, there
should be specific representations to that effect, as well as a disclosure of any
conflicts of interest.

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Office of Regulation and Interpretations
June 22, 2011
Page 9

Please contact me if you would like further information on any of these

comments.
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ce: Phyllis C. Borzi, Assistant Secretary of Labor, U.S. Dept. of Labor, EBSA
Michael L. Davis, Deputy Assistant Secretary, U.S. Dept. of Labor, EBSA
Fred J. Wong, Pension Law Specialist, U.S. Dept. of Labor

LAOI/ 1023116.5


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June 22, 2011

Via Electronic Mail - e-ORI@dol.gov

Office of Regulation and Interpretations
Employee Benefits Security Administration
Attn: Definition of Fiduciary Proposed Rule
U.S. Department of Labor

200 Constitution Avenue, N.W., Room N-5655
Washington, D.C. 20210

Re: Proposed Regulation on Fiduciary Investment Advice
Dear Sir/Madam:

I am writing to provide additional comments on the proposed amendment
to the regulation defining fiduciary investment advice, §2510.3-21(c), and to request
additional clarification of the application of the proposed regulation, if adopted, with
regard to the “platform” exception. In that regard, I support the comments filed by the
American Benefits Council (“ABC”) and, in this letter, augment those comments. The
specific comments referenced in this letter are found in the section of the ABC
correspondence to the Department entitled Plan Menu of Investment Options.

The ABC comments were particularly insightful with regard to the
practical operations of the provider marketplace.

The ABC comments and my commentary are as follows:

e The service provider may provide the plan fiduciary with objective factors that
others commonly use in selecting plan menus, such as fund ratings, past
performance (measured against competitive funds), risk measurements, fees, and
manager tenure.

COMMENTARY: Small plan sponsors, who are often unsophisticated in
financial matters, would find value in the observations and experiences of others,
including common investment industry experiences and criteria, practices of other
plan sponsors, and observations of providers. In order for small plan sponsors to
be able to make decisions about “individualizing” the investment line-up for their
participants (for example, fewer and more traditional investments for a less
educated workforce), they would benefit greatly from an understanding of what
other plan sponsors or knowledgeable investment industry practitioners are doing,
as well as from data and information from providers (e.g., recordkeepers) based
on their experiences and on commonly accepted industry criteria. This

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June 22, 2011

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A service provider might design its arrangements so that all “mapping” is done
to the plan’s QDIA.

COMMENTARY: Fiduciary status should be avoided if the provider has made it
clear, at inception, that its sole method of intake for new plan clients is through a
QDIA default process. Alternatively, if the provider has several alternative intake
processes (for example, 404(c)(4) mapping, 404(a)(5) defaults to QDIAs, or other
mapping procedures), and the plan sponsor may select from among them, the plan
sponsor would have made the decision about the particular approach and the
offering of the alternative should not be viewed as fiduciary advice.

The key to this approach is that the service provider’s approach or approaches for
the intake of new plans should be described in writing to the plan sponsor prior to
the provider being selected as the recordkeeper for the plan. The alternatives
should be clearly and prominently described. In addition, any conflicts of interest
(e.g., proprietary products or increased compensation) should be described.

The service provider may also use the seller exemption. It makes little sense to
prohibit a service provider from using the seller exemption in situations where the
service provider is selling a particular plan menu.

COMMENTARY: The selling exemption is being interpreted in a variety of ways
by the private sector. For example, some are interpreting it as applying only
where the seller owns or creates a particular asset. That might include the seller of
real estate or the seller of an insurance policy. (Similarly, the agent portion of the
seller’s exemption is being interpreted in a variety of ways by the private sector.
For example, some believe that it applies only to situations where a person is
contractually an agent of the seller of property as described above.) Another
example of an interpretation of the selling exemption is that a seller may
distribute so-called “proprietary” products. For example, in that case, an
investment management firm might manage a mutual fund which, of course, it
does not own. Instead, it has a fiduciary (under the securities laws) management
advisory relationship. Can the investment manager, or an affiliated entity, sell
something it does not own? Would it be entitled to the selling exemption? Those
questions are unresolved.

Similarly, is an unrelated broker-dealer entitled to the seller’s agent status where
it does not have a traditional agency relationship with the mutual fund and
particularly where the broker-dealer has independent legal obligations to the plan,
for example, the suitability standard? Those issues are unresolved.

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Office

of Regulation and Interpretations

June 22, 2011

Page 2

information is, virtually by definition, generic and not individualized to the plan.
Therefore, providing this information should not be considered to be
individualized, that is, to be fiduciary investment advice.

While that conclusion may be fairly obvious to ERISA experts, the lack of
specific guidance in the area is disconcerting to providers and, in fact, some
courts may have difficulty, without DOL guidance, in understanding the subtle
distinctions between general information and individualized recommendations. It
is easy to forget that many of our concepts and theories are not easily understood
by others, including judges in the court system and arbiters in arbitration settings.
Therefore, I urge the DOL to provide additional, explicit guidance in this area,
perhaps in the form of comments in the preamble to the final regulation, if
adopted.

The service provider may screen funds based on objective criteria that are
provided by the plan fiduciary or that are commonly used in the industry. For
example, if the plan fiduciary establishes criteria based on fund ratings, past
performance (measured against competitive funds), fees, risk, and manager
tenure, the service provider may screen the available funds based on such criteria
and provide the plan fiduciary with fund options that meet the plan fiduciary’s
criteria. Within each investment category, there would generally be multiple funds
for the plan fiduciary to choose from, but in some circumstances, there could bea
single fund.

COMMENTARY: While general information about investment criteria and
performance may be helpful to unsophisticated plan sponsors, there is a need to
apply those criteria to the investments available on a platform in order to reach a
limited and reasonable list of investment alternatives to be offered by a plan. That
involves two decisions: First, which asset classes should be offered (in order, for
example, to satisfy the broad range condition of the 404(c) regulation); and
second, the selection of mutual funds or other investments to populate each of
those asset classes. That process is somewhat complex and certainly time-
consuming . . . unless it is computerized. To assist plan sponsors, providers should
also be able to define and explain the criteria (for example, which criteria may
produce the lowest cost mutual fund lineup). Focusing on the selection of the
investments, plan providers should be able to offer, without fear of fiduciary
status (and the resulting 406(b) prohibited transactions), the tools to assist plan
sponsors in applying general investment criteria to the available investments. So
long as the criteria are not biased, and so long as the plan sponsor has the right to
include or exclude criteria, there is little, if any, opportunity for abuse. And, the
value to the plan sponsor is substantial.

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June 22, 2011

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Key issues are: Are the criteria generally accepted by the investment community
(and is there a representation to that effect); is the system such that the plan
sponsor can exert sufficient control to minimize the possibility of bias (in other
words, does a plan sponsor have adequate opportunity to use multiple selection
criteria, and to eliminate and/or weight the criteria to avoid bias); and is the
program designed to present investments that satisfy the criteria without
representing that the provider is recommending them or that they are necessarily
individualized to the plan?

The service provider may present non-individualized model plan menus that other
similar businesses have chosen or that reflect a conservative, moderate, or
aggressive investment approach, with an explanation of objective differences
between the menus.

COMMENTARY: As noted, the first step in the selection of an investment line-
up for a 401(k) plan is to select the asset classes (or investment categories) that
will enable the participants to assemble portfolios in their accounts that
appropriately balance the risk tolerance of the participant with the participant’s
need for return. That is a fundamental part of modern portfolio theory, which in
turn is a fundamental part of ERISA’s investment concepts. However, it is
probably fair to say that many small plan sponsors do not understand the concepts
of modern portfolio theory, the selection of asset classes that are not highly
correlated to each other, and so on. As a result, they need help . . . not with
individualizing the investments to their plan or their participants—because plan
sponsors know the demographics of their workforces (e.g., ages, compensation,
education levels, etc.), but instead with understanding and applying the broad
concepts of asset classes and investment criteria. Given proper information and
tools, plan sponsors can likely make decisions about which line-ups are
appropriate for their plans. That is, plan sponsors can individualize the general
information, categories of investments, alternative investment line-ups, and so on,
to their plans. But, in all likelihood, they will have a difficult time doing that
without being provided with general alternatives (that are not individualized, but
instead are hypothetical) to accept, reject or modify.

In this sense, the suggestion of alternative generic line-ups (based on the practices
of other plan sponsors or on general risk tolerance approaches by knowledgeable
investors) can provide plan sponsors with valuable information to make decisions
about the appropriate line-ups for their plans.

LAOL/ 1023116.5